Cow Depreciation – Don’t Follow a Recipe
There has been quite a bit written about managing cow deprecation over the past few years. In simple terms cow depreciation is the reduction of value of a cow from its height of value until it is sold for salvage. I’m glad this often hidden cost is getting attention and that ranchers now see this as a significant cost. It can be an easy cost to ignore, because when you keep and develop your own heifers, you don’t write a check for cow depreciation, but it may be the first or second largest cost to keeping a cow each year.
To look into the issue of cow depreciation I find it easier to take cows out of it initially. Let’s think about depreciation on a pickup. If we buy a pickup for $60,000 then drive it for 5 years and sell it for $40,000 the formula to calculate annual depreciation is:
Purchase Price – Salvage Value
Years of Service
In our example it would be ($60,000 – $40,000)/5 or $4,000 annual deprecation. Of course, a pickup doesn’t depreciate the same every year. Equipment usually depreciates rapidly initially, then the deprecation slows down after a few years.
Now let’s apply our formula to cows. If the purchase price of a young, bred animal is $1,400, the salvage value is $700 and the years of service is the number of calves the average cow produces in her lifetime. If you follow the national average of about a 20% replacement rate assuming culling opens and dries, then the average cow produces just over 3 calves in her lifetime. Sure, we all remember the cow that produced 10 calves, but what about all those who produce 1 and fail to rebreed. When we average those in, most ranches are between 3 and 4 calves per cow. We will use 3.5 for our example. So, the math will be ($1,400 – $700)/3.5 = $200. What this tells us is that on average, each cow is costing the business $200 in cow depreciation every year. It is a significant cost to the business! Most of your neighbors are not doing anything to manage it because they don’t even know it exists.
However, just like the pickup depreciates at different rates during its life, so does the cow. Wally Olson has helped me and many others understand this through the cow value curve.
If you plot the value of each age class of cow throughout her life you realize the young animals appreciate, and cows older than 5 depreciate rapidly. This means that most of the depreciation is sitting on the backs of those older cows. There is a dangerous way of thinking that is common among ranchers that you need to produce 3-4 calves before that cow breaks even. This is crazy! That cow should pay her way every day on the ranch or she should be gone. If you decide to keep a heifer calf and turn her into a bred heifer then you took a $700 heifer calf and made $1,300 bred heifers or $900 open heifers. Both are gaining value, but you have her annual costs with no calf coupon to collect. If you can’t do that profitably, then maybe you should buy them from someone who can.
As you look at the cow value curve, the better question is, where on the curve lies your competitive advantage? Are you good at making young bred animals? Are you able to take the middle-aged bred cow and run a simple system at scale that does this well? Are you able to take the older cows, get another calf or two from them and salvage them for about the same you paid for them? Where is your competitive advantage? One guarantee is that your ranch has some age class of animal that is dependably more profitable than another age class. Finding out which and doing more of that could make a significant difference in your profitability. Of course, this isn’t for everyone. For some the ranch isn’t about profit maximization. Having a home-raised herd that we are proud of and that fits our goals may be more important.
Cow depreciation is a major cost that demands management attention. But, there isn’t a formula to address it. What works for one ranch will not work for another because your skills, overheads, and direct costs are different. It does justify a thorough dive into the economics and evaluation of alternatives that fit your operation.
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